Change in the air

There I was, sitting in Punjab province’s historical Governor House, listening to a talk about ‘the poor’ in Pakistan. The event was organized to welcome the efforts of Pakistan’s Lahore-based Farz Foundation, a microfinance organization which was formed on an ideological basis of ‘partnership with the poor and profit-and-loss sharing’ as its primary investment methodology.

Pakistan, where banking has always been for the élite and the rich, is now seeing a change in the air, and it is good for the poor. For the first time microfinance is being customized according to both cultural and religious circumstances. As the first Islamic microfinance organization of Pakistan, with a fully fledged Islamic vision of trade and business, the Farz Foundation has provided an Islamic solution to the non-productivity of micro-loans, which can not only cater to a huge Muslim market but also to a general clientele.

‘The asset-based Islamic microfinance integrated approach is the basic tool of the foundation to get long-term sustainability, because the Farz Foundation has a strong belief that the sustainability of the client is the sustainability of the organization,’ said Farhat Abbas Shah, the CEO and a famous Urdu poet.

In Pakistan, commercial banking is very well developed, courtesy of the large number of national and international banks. However, commercial banks only have four million borrowers, in a population of 170 million. At the same time, there is a significant segment of the population that has welcomed Islamic microfinance.

One good thing about Islamic finance is that it offers partnerships without any regard to caste, colour or religion. And the minorities, for their part, are happy to be helped by whoever takes on this noble job. The Farz Methodology has knitted together different communities, while creating a relationship of trust with the primary lender. The Foundation has on its board people from very diverse backgrounds, and its first-ever branch was opened in an area inhabited mostly by non-Muslims, making them among the first beneficiaries.

Pakistan is going through difficult times, fighting the so-called ‘war on terror’. Poor countries are also being hit hard by the shrinking world economy. A recent report from Consultative Group to Assist the Poor (CGAP) shows that the recent microfinance crisis in Pakistan can partly be attributed to high growth. An uncertain political and economic environment, high inflation, rising poverty and overindebtedness are some of the contributing factors.

Some experts believe that the crisis was due to a combination of factors, including high growth. Undeniably, microfinance loans increased rapidly in the last few years and in some urban areas this resulted in overindebtedness. Loan officers were good at lending but not so good at recoveries, especially when the whole community ganged together and refused to pay.

Shah explains that crises do come, and when they come, the best strategy is always to identify the factors contributing to it so that past mistakes are not repeated, and the best remedies can be offered:

‘While not denying the contributions made by microfinance, we must begin stocktaking and reevaluating our methods so that the best possible results can be had. We have learnt our lesson from the experience of the microfinance loan repayment crisis. We found it far more imperative to adopt an asset-based methodology, instead of cashed-based strategy.’

Another important fact regarding the crisis was that politicians only stepped in when it had already reached an unsustainable level. The very fact that finally a couple of local politicians had to get involved in an individual capacity indicates unrest among the borrowers. Senior politicians at both federal and provincial level even came to the rescue of lenders, yet nothing substantial was done to ease the plight of the minorities. The Farz Foundation has embarked on its project to prove the usefulness of the microfinance sector in fighting the curse of poverty. The poor want to change their lives, and I hope the Farz Foundation will initiate the process with commitment, honesty and flawless method.

By way of conclusion, it is worth noting that the Farz Foundation recently completed its two-year pilot project. The organization compared results of money-based microfinance loans and their own asset-based loans. The Farz Methodology (asset-based microfinance) showed 80 per cent positive and productive results, while traditional microfinance, which is based on credit in the shape of currency, showed 80 per cent negative and non-productive results. The study confirms reports already being published in the international media about the weakness of traditional microfinance deals in terms of pulling people out of poverty. Although the efforts made by the CGAP and other agencies at the international level, and Pakistan Poverty Alleviation Fund at the national level, cannot be ignored, poverty alleviation – given the speed of inflation and the current increase in poverty – demands more sincere and creative efforts.

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